SAB wants next minister to implement good governance project

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Local authority funds should demand the implementation of the good governance recommendations and an open discussion about the pros and cons of scale, the Local Government Pension Scheme Advisory Board has suggested, as LGPS consolidation is expected to be on the agenda for any incoming minister. 

On 15 May, minister for local government Simon Hoare wrote to the chief executives and section 151 officers of local authorities to ask how they will complete asset pooling, adding various questions that seek to determine how efficiently pension funds are being run, and demanding an answer by 19 July.  

Although parliament has since been dissolved ahead of the general election on 4 July, the LGPS Advisory Board published a statement on Tuesday and suggested a template for administering authorities that want to respond to the letter, as the LGPS seeks to establish and potentially influence where a future government would want to take it.  

Among others, the template text reads: “The most impactful thing that the Department [for Levelling Up, Housing and Communities] could do to improve the efficient and effective managing of the scheme would be to continue, without delay, the implementation of the Scheme Advisory Board’s good governance recommendations.”  

The SAB says these could be “implemented within a matter of months of a new government being established”.   

The board mentions private market and illiquid assets as it highlights higher costs across the LGPS, alongside a growing membership and implementation of the McCloud remedy.  

“Administering an increasingly complex scheme will remain a challenge for funds. Any ambition for the achievement of long-term savings and efficiencies through consolidation does not come without significant operational risks, particularly affecting scheme members but also employers,” the SAB writes. "We would welcome an open discussion about the possible benefits – and limitations – of scale, and the role of local accountability in the management of the scheme.”  

The fact the SAB points to the limitations of consolidation echoes responses to a recent survey by the Pensions and Lifetime Savings Association, which found that just two in five LGPS representatives support asset pooling and a third oppose it.
 
   
In March 2023, combined assets stood at about £354bn, according to the LGPS Advisory Board’s latest annual report. Last year, the government said it expects LGPS asset pools to reach £200bn or more by 2040, when the LGPS could reach total assets of about £940bn - but many in the sector believe that a potential Labour government would seek to go further, faster on consolidation.  

This is part of the reason why SAB is now encouraging funds to respond to the letter, suggested Barry McKay, a partner at consultancy Barnett Waddingham. Most if not all funds are planning to respond, he believes, as responses could be useful for any incoming minister.   

Consolidation would help to keep the scheme separate from the council – and McKay noted that this question of separation was what triggered the SAB’s good governance project. Many local authority funds already have the recommended practice, but “the good governance review is to try and bring everyone up to best practice”, noted McKay.  

The recommendations include that funds would have to produce an annual compliance statement, create a conflict of interest policy, and have a plan for knowledge and skills training for committees and officers among others. They would need to report on progress, and this would be externally assessed, which is not currently the case. The project would require all local authority funds to have formal frameworks.  

He thinks it is likely a new minister would continue to implement the recommendations of the project: “It would seem like an obvious thing to go with it.”  

Labour has not said what its plans would be for the LGPS, but shadow work and pensions secretary Liz Kendall said in March that public sector pensions would be included in the pensions review the party would conduct if it came to power.  

McKay said Labour could, for example, try to accelerate the timeline of the Conservatives’ LGPS consolidation plan, or even seek to create a single LGPS superfund.  

The “nuclear option” would be to turn the LGPS in England and Wales into an unfunded scheme, he added, but pointed out that the scheme’s returns have helped pay for a large portion of contributions. Contribution rates in the LGPS have been stable and could reduce for 2025, while there have been steep rises in rates across unfunded public sector schemes after the last valuation. This has led some to go as far as to propose the opposite – thinktank New Financial recently suggested that turning unfunded schemes into funded ones would save the state £70bn over the next 20 years, pointing to Canada as an example. 
   
   

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